Debtor warrant for company acquisitions / company sales
As a rule, a debtor warrant is always agreed between buyer and seller in the context of an M&A transaction if the seller accepts a lower purchase price and an additional amount is paid to the original seller in the event of a resale of the shares in the company by the buyer. Especially in the case of company sales in crisis or management buy-out transactions, such arrangements are often found. A debtor warrant should not be confused with an earn-out arrangement. In the latter case, the seller can influence the achievement of the earn-out targets by remaining in the company; in contrast, a seller has no influence on the performance of a debtor warrant. The following is an example (excerpt) of a contractual arrangement:
"....If the buyer sells the participation (in whole or in part) by 31 December 20xx, the seller shall receive from the buyer an amount equal to x.x % of the capital gain realised by the buyer. The capital gain shall be the sale price agreed between the buyer and the acquirer of the participation, less increases and plus reductions in the share capital of the Company, insofar as these have become effective by the time of the sale of the participation and insofar as the buyer has made contributions to the capital increase or, in the case of a capital reduction, has received contributions back by this time. The amount is due for payment within five (5) banking days after receipt of the sale price by the (selling) Buyer. The purchaser will provide evidence of the sale price to the seller by producing the relevant deeds and documents....".
An example of a debtor warrant in a large M&A transaction is the amount paid by Lufthansa to the shareholders of SWISS in the equivalent of 172 million euros.
Earn-out versus debtor warrant
A special type of earn-out clause is the excess proceeds clause or the debtor warrant. This clause obliges the buyer to pay the earn-out in the event of a resale of the target company. It is often used when the target company is sold to a turn-around fund or a financial investor.
With an earn-out clause, the seller wants to ensure that he will participate in the event of a quick resale of the target company (quick flip) and a high profit by the buyer. In this way, he cannot be accused of having sold too early or at too low a price.
The contractual design of surplus clauses is varied, but the resale price is usually the most important benchmark.
KP Tech Corporate Finance (Germany - Austria - Switzerland)
As a professional M&A advisor, KP Tech Corporate Finance advises either the buy side or the sell side. We would be happy to discuss with you in strict confidence the current company valuations as well as the possibilities and probabilities of success in the event of a sale of your company. Contact KP Tech Corporate Finance in strict confidence by phone +49 89 21 53 66 09-0 to arrange a personal and non-binding meeting. Benefit from more than 20 years of experience in international M&A and corporate finance consulting.
Topic of this article: Debtor warrant in the case of company acquisitions/sales - differentiation from earn-out provisions
